Sources: PayPal to launch Square competitor

PayPal’s plans to announce a solution for small businesses at an event this Thursday includes a mobile payment dongle that would compete against Square, Intuit (intu), Verifone and others, according to sources we’ve talked to who are familiar with PayPal’s plans. The dongle, which might be shaped like a triangle, will allow small business owners to process credit card swipes from a smartphone, similar to Square, Intuit’s GoPayment and Verifone’s PAYware.

The potential move, part of a larger brand refresh, would fall in line with PayPal’s recent strategy to bring its payment services into physical stores. It’s working with a host of partners to bring its in-store system to bigger retailers including Home Depot, which is launching the service in more than 2,000 locations. That system relies on integrating PayPal software into existing point-of-sale terminals so users can pay either by swiping a PayPal pre-paid card or by entering in their phone number and PIN, which connects to their account.

The in-store system works ideally for retailers with existing hardware. But a mobile payment acceptance tool like Square would allow PayPal to target much smaller businesses with one or two locations and give them a simple way to process card transactions. Square has shot to success with its dongle and is now processing $4 billion annually. PayPal spokesman Anuj Nayar declined to confirm the news, saying: “We’re unveiling what we believe will be the future of commerce for small businesses.”

PayPal’s move into Square’s turf would sharpen the rivalry between the two companies. Square’s COO Keith Rabois, an early employee at PayPal, dismissed the threat from his old employer in an interview with GigaOM last year, saying its payment assets and fraud models were outdated. He predicted that Square would be more valuable than PayPal eventually.

“The brand has atrophied in the last decade and there are not a lot of users who wish they could use a PayPal account,” he said. “That may have been true a decade ago but not today.”

PayPal, however, has been ramping up its efforts to win the in-store battle and is increasingly confident about its chances. Don Kingsborough, who joined PayPal last year as its VP for retail and prepaid products, told me in an interview that in-store payments was PayPal’s to lose. Now, it seems like PayPal is making a play for the entire market, not just bigger retailers.

It’s going to be interesting to see how merchants respond, if PayPal follows through on this. PayPal has more than 100 million account holders and it’s a well known name for online payments. But its track record for in-store payments is thin. For small business owners, many may not naturally gravitate to PayPal for in-store payments. But a dongle solution, along with an app for merchants that allows them to take PayPal payments via a phone number, may be compelling for some merchants interested in tapping PayPal’s existing customer base.

PayPal hasn’t always been the favored choice of merchants but it seems to be working to improve its standing with them. It recently announced that it would refine its 21-day hold policy on PayPal accounts for eBay sellers, which allows PayPal to freeze funds in merchant accounts. It now says it moves held money into a non-interest bearing account.

We’ll know more about PayPal’s small business plans at its San Francisco event on Thursday, which is likely to touch on other areas as well. But the early signs suggest the mobile payment space is about to get even more competitive.